Quarterly Update

Oct. 2019

Garrett R. D'Alessandro, Chief Executive Officer | Oct. 2019

From the Desk of Garrett D’Alessandro, CFA, CAIA, AIF®

We continue to see signs of slowing economic growth and high valuations across traditional asset classes, indicating that we are late in the economic and investment cycle and leading us to expect lower returns and increased volatility in the next few years.

Over the last decade, City National Rochdale has dedicated more research resources to identifying attractive investment opportunities that address the unique needs of our clients.

We expect to continue expanding our capabilities in both traditional and alternative investment categories, enabling our clients to access the potential benefit from diversifying strategies.

Looking ahead, City National Rochdale will carefully navigate this late-cycle environment, balancing total return with principal protection.

Alternative Investment Strategies for the Late-Stage Expansion

We continue to see signs of slowing economic growth and high valuations across traditional asset classes, indicating that we are late in the economic and investment cycle and leading us to expect lower returns and increased volatility in the next few years. This is often a signal to de-risk portfolios, and we have reduced exposure to particularly vulnerable areas. However, being too defensive too early can be costly, as we still expect the economy to grow and anticipate low interest rates to limit returns from traditional bond portfolios.

These circumstances highlight the role that strategic allocations to alternative investments can play in client portfolios. These investments have characteristics that are distinct from stocks and bonds and therefore can provide extra diversification as well as potential for attractive returns. While this can be beneficial for clients, alternative investments also present challenges that require thoughtful consideration. The following are particularly important when analyzing alternative investments:

LIQUIDITY: These investments typically require investors to commit their capital for specific periods of time, sometimes one or two years, sometimes 10 or more.

CASH FLOWS: Certain alternative investments provide regular income, while others do not provide distributions for several years.

STRUCTURE: Some vehicles, such as limited liquidity mutual funds or partnerships, can impact the investment experience.

TAXES: Filing requirements and tax efficiency vary across alternative investments.

REPORTING: Quotes are usually not available daily; investors assess returns and price volatility via quarterly reports.

DIVERSIFICATION: Some investments can diversify portfolios better than others, so the correlation of the investment with the client’s other assets is important.

EXPERTISE: Alternative investments are highly specialized, requiring significant time and resources to find managers with necessary expertise.

Over the last decade, City National Rochdale has dedicated more research resources to identifying attractive investment opportunities that address the unique needs of our clients. We expect to continue expanding our capabilities in both traditional and alternative investment categories, enabling our clients to access the potential benefit from diversifying strategies.

Looking ahead, City National Rochdale will carefully navigate this late-cycle environment, balancing total return with principal protection. A key part of our approach will continue to be suitable allocations to alternative investment strategies that can help provide stronger returns in the face of low expectations from traditional asset classes. Our current alternative investments include:

REINSURANCE: Insurance contracts covering natural disasters can provide attractive returns uncorrelated with traditional asset classes.

CLO EQUITY: Structures financing corporate loans can provide high levels of income and diversify traditional fixed income portfolios.

PRIVATE EQUITY SECONDARIES: Purchasing discounted interests from investors in private equity investments can generate strong returns with early cash flows.

HEALTH CARE ROYALTIES: Financing later-stage drugs allows for potentially high returns that are less exposed to macroeconomic forces.

CAPITAL LEASING: Owning and leasing hard assets, such as railcars and aircraft, can provide strong, stable income that is tax-advantaged due to the application of accelerated depreciation.

SHORT-TERM EMERGING MARKETS DEBT: Certain emerging markets bonds offer very attractive yields, a unique opportunity over the next few years.

Key Points

We continue to see signs of slowing economic growth and high valuations across traditional asset classes, indicating that we are late in the economic and investment cycle and leading us to expect lower returns and increased volatility in the next few years.

Over the last decade, City National Rochdale has dedicated more research resources to identifying attractive investment opportunities that address the unique needs of our clients.

We expect to continue expanding our capabilities in both traditional and alternative investment categories, enabling our clients to access the potential benefit from diversifying strategies.

Looking ahead, City National Rochdale will carefully navigate this late-cycle environment, balancing total return with principal protection.

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Important Disclosures

Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as of the date of this document and are subject to change.

The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. This presentation is not an offer to buy or sell, or a solicitation of any offer to buy or sell, any of the securities mentioned herein.

Certain statements contained herein may constitute projections, forecasts, and other forward-looking statements, which do not reflect actual results and are based primarily upon a hypothetical set of assumptions applied to certain historical financial information. Certain information has been provided by third-party sources, and, although believed to be reliable, it has not been independently verified, and its accuracy or completeness cannot be guaranteed.

Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as of the date of this document and are subject to change.

Concentrating assets in a particular industry, sector of the economy, or markets may increase volatility because the investment will be more susceptible to the impact of market, economic, regulatory, and other factors affecting that industry or sector compared with a more broadly diversified asset allocation.

Private investments often engage in leveraging and other speculative investment practices that may increase the risk of investment loss, can be highly illiquid, are not required to provide periodic pricing or valuation information to investors, and may involve complex tax structures and delays in distributing important tax information.

Alternative investments are speculative, entail substantial risks, offer limited or no liquidity, and are not suitable for all investors. These investments have limited transparency to the funds’ investments and may involve leverage which magnifies both losses and gains, including the risk of loss of the entire investment. Alternative investments have varying and lengthy lockup provisions. Please see the Offering Memorandum for more complete information regarding the Fund’s investment objectives, risks, fees, and other expenses.

There are inherent risks with equity investing. These risks include, but are not limited to, stock market, manager, or investment style. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. Investing in international markets carries risks such as currency fluctuation, regulatory risks, and economic and political instability. Emerging markets involve heightened risks related to the same factors, as well as increased volatility, lower trading volume, and less liquidity. Emerging markets can have greater custodial and operational risks and less developed legal and accounting systems than developed markets.

There are inherent risks with fixed-income investing. These risks may include interest rate, call, credit, market, inflation, government policy, liquidity, or junk bond. When interest rates rise, bond prices fall. This risk is heightened with investments in longer-duration fixed-income securities and during periods when prevailing interest rates are low or negative. The yields and market values of municipal securities may be more affected by changes in tax rates and policies than similar income-bearing taxable securities. Certain investors’ incomes may be subject to the Federal Alternative Minimum Tax (AMT), and taxable gains are also possible. Investments in below-investment-grade debt securities, which are usually called “high yield” or “junk bonds,” are typically in weaker financial health and such securities can be harder to value and sell, and their prices can be more volatile than more highly rated securities. While these securities generally have higher rates of interest, they also involve greater risk of default than do securities of a higher-quality rating.

All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future performance.

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